Test practice questions
1) You are an investment analyst. The retail market that you have been investing in, tobacco, has been hit by an increase in sales taxes that are levied on tobacco sellers. Assume that the price elasticity of demand for tobacco is close to zero, while the supply elasticity is very high.
Using a diagram, explain whether you would be prepared to continue investing in the tobacco market, if market revenue is your main consideration.
2) Assume that the following situations can be described using demand and supply curves. Please state whether the following statements are TRUE or FALSE, and provide a brief explanation (with a diagram for each (a) and (b)):
a) "Recently, sales of Manuka honey have risen. This implies that the supply curve of Manuka honey must have shifted to the right, maybe because more suppliers have entered the market."
b) "Technological advances make the manufacturing of mobile phones much cheaper for manufacturers. Incomes are rising slightly, and mobile phones are a necessity good. From this information we conclude that the price of mobile phones must go up".